"Which, it turns out, is a trader’s field day. What this meant, in its simplest form, is that these traders (or salespeople) could buy bonds at the "market" price from intelligent hedge fund managers in NYC and sell this same crap at much higher levels to unsophisticated (but legally considered "sophisticated") pension funds and insurance companies in middle America. What I discovered, quite starkly, is that the part of Wall Street that I worked in was simply transferring wealth from the less sophisticated investors often teachers’ pension funds and factory workers’ retirement accounts, to the more sophisticated investors..."
"'We are important providers of liquidity that create stable financial markets. We’re a crucial part of a system. And besides, if we don’t do it, someone else will.' These are the lies that people tell themselves so that they can buy larger homes."
Both of these things are completely true, and that's why American public policy is having such a hard time grappling with Wall Street. We try to rationalize the state of affairs by pointing out all the ways that Wall Street has an "unfair advantage" but the fact of the matter is that: what do you expect in a free market system that rewards every marginal advantage other than wealth to flow from less sophisticated people to more sophisticated ones? We like the idea of letting everyone transact freely, but we are uncomfortable with the "winner take all" implication of that policy.
Wall Street:
1) Hires some of the brighest people in the country (e.g. 40% of the author's class at Yale);
2) Aggressively weeds out that impressive pool by forcing out all but the most promising people within a few years;
3) Trains them rigorously and maintains a level of institutional knowledge transfer that tech companies can only dream of.
Why are we surprised that they disproportionately get the better end of every transaction?
>what do you expect in a free market system that rewards every marginal advantage
I expect the government to allow so-called free market capitalists to fail when they fail. Lehman was emphatically NOT staffed by the best and brightest -- it collapsed.
All the other big banks should have been allowed to collapse as well, rather than be bailed out by a staggering infusion of free government money and hidden bailouts like the proppping of AIG. (And don't get on about how the money was paid back - TARP was just one portion of the bailout, the Fed discount window was hugely important as banks bellied up to borrow at a discount and then lend the money right back to the govt at higher rates by buying treasury bonds.)
If that had been allowed to happen, your use of the term "free market" might have some validity in abstract terms. In the case of Wall Street, that term is inappropriate in virtually every sense.
You're assuming that the occasional gigantic bankruptcy isn't a natural outcome of the smartest strategy as a bank. But when you're comped on this year's profits, and a large chunk of your comp is cash, it makes sense to take huge risks that result in near-term profit, or immense long-term profit, and largely ignore the potential for a total collapse. (Not to mention most of the employees found jobs at other banks, or even just stayed at Barclays after the bankruptcy.)
If you're making $1M-$10M a year, the downside to a 5% or 10% chance of your employer going bankrupt is not so large that you're going to reduce your income to prevent that. And if you are, they'll just replace you with someone who is less "risk averse."
You bring up a great point, which is actually an excellent alternative answer to OP's question, "what do you expect?"
What we should expect is for banks to protect themselves as businesses by changing compensation to account for long term risk. And if they fail to do that organically, we should acknowledge that the market is failing in a dangerous way and more regulation around compensation is needed.
I don't know that you need to regulate compensation. You just need to not bail them out when they blow up, and it will self-correct. And you shouldn't let them gamble with federally insured (FDIC) money - either be a investment bank or a commercial bank, but not both, so that regular consumers don't get caught in the middle.
I totally agree. Had everyone been allowed to fail, we would've been well on the way to recovery already. It's frustrating to watch the government keep this pathetic lifeline going which will fail in the end anyway.
But isn’t this scenario impractical for reasons shown by the current problems in Europe? On Cyprus, the banks were considered “too big to fail”, meaning that they would take the whole economy with them if they went down.
Cyprus is not a good case study - the banks there actually are the whole economy, to some degree. Aside from tourism, they were supporting themselves by banking a lot the money coming of Russia, etc. The assets of Cypriot banks were ~9X their GDP, and the size of the estimated bailout was about 1X GDP.
If you don't let big banks fail, then nobody ever has to worry about counterparty risk, and they won't keep an eye on each other to see if one bank is taking too much risk or backing too many bets.
This is known as a partnership, where the partners' personal assets are at risk. This is what the investment banks used to be, way back when. (Consulting firms too, for that matter)
If I had some sort of magical power to enact this kind of reversal to where ibanks were once again partnerships, I'd do it in a heartbeat.
Ironically for the great-grandparent post, both the grandparent and parent post are "both completely true" as well.
We quite correctly should expect governments to (have) ensured that these corporations could be allowed to collapse, indeed they (bravely) did with Lehman, just AIG was worse.
We also should expect that if you give someone 10-40 years salary each year, then that bonus really really should be well aligned with the stockholders own goals, or they will act in their own best interest (correctly).
The only thing that turned a disaster into a once in a century clusterfk was being unable to let them collapse.
I could swear I'd read somewhere a couple years ago that a lot of the TARP money - especially from smaller banks - was repaid by them refinancing into SBA loans. So, yes, technically TARP funds were repaid, but often by borrowing from some other govt program at a lower rate.
I might refinance my house to a lower rate, but I would be lying if I said I "paid off" my house. I paid back one lender by borrowing from another, that's all.
But... I can't find the info I thought I had bookmarked some time ago outlining if/when this happened.
"More than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government's Troubled Asset Relief Program.
The Small Business Lending Fund was meant to raise capital at smaller banks, which tend to lend more heavily to small businesses, in the hopes of jump-starting growth and employment. But instead of directly lending to small businesses, many of the banks used the money to rid themselves of higher-cost TARP debt and tougher restrictions."
That 4 billion was just for one year, AFAIK. I don't think this particular sleight of hand was used on a large portion of TARP money, but I also have a hunch there were other ways that TARP money was 'paid back' while still leaving tax payers holding some of the bag still.
>Lehman was emphatically NOT staffed by the best and brightest -- it collapsed.
"Lehman collapsing" might be unrelated to "individuals at Lehman succeeding". You make a big gamble and if you succeed, there is big bonus. If you lose, there are no financial penalties (at worst, you lose your job which should not be a big deal for someone who has already made millions. Like, Dick Fuld).
In fact, in absence of regulations like bonus clawback or multi-year bonus vesting, folks on Wall St. seem to have behaved in a completely rational way until 2008 crash.
If we let the banks go down should we have let the counter parties go down as well? Should AIG have gone down? While I agree that it would have been better in the long run to let them fail there would have been tremendous consequences to doing so in the short term.
If a public pension fund went down with it should it have gotten tax payer money? How about GE? Was the intervention in the short term commercial paper market appropriate? Incidentally this is the one intervention that I still feel was absolutely necessary.
While I can hate on the banks as much as the next person there would have been real consequences to letting them fail and I don't think that most people would have gone along with it. If JP Morgan had fallen into bankruptcy and companies (regular ones) that bank there had been unable to make payroll since there cash (and cash convertibles) were frozen there would have been chaos.
This started with small interventions like the latin american debt crisis and now that the genie is out of the bottle its not going back in.
Exactly. Not disagreeing with the OP, but in it's purest sense "free marke"t assumes that these more sophisticated ones have just as much to lose as the unsophisticated (and therefore bear the same risk). This is the problem when you try to mix regulation with deregulation.
> simply transferring wealth from the less sophisticated investors often teachers’ pension funds and factory workers’ retirement accounts, to the more sophisticated investors...
Exactly. Wall street and investment have wonderful effects -- funneling money towards companies that can use it in amazingly productive ways. It provides an incredibly valuable service.
But the flip side is exactly this, that pension funds, ordinary investors, etc. wind up getting screwed.
I, for one, don't realy see the problem with Wall St. in itself, but rather -- who on earth is allowing the managers of pension funds to "gamble" with their money like this? Why should retirement accounts get invested in anything but government bonds and index funds? Employees get duped because they "trust" their company to take care of their pension, or "trust" their financial advisor to give them good advice.
At heart, I think it boils down to a fundamental misguided notion, prevalent in America at least, that investment is good, that you can grow your money, that you can outwit the stock market -- when the reality is, that for 99% of people, investment is just playing the lottery, and over the long run, Goldman etc. is going to win, because they're smarter than you. Just like, in the long run, the lottery always wins.
>Why should retirement accounts get invested in anything but government bonds and index funds?
Step 1: Pension return rates get "set" during boom time highs.
Step 2: Boom times end, the pension fund is grossly under funded, and the manager needs to find ways to get excess return beyond what the typical fixed income and equity products can offer.
Step 3: Pension Managers reach for "alternative investments", hoping for higher returns that can offset lackluster market returns.
What if I told you the economy engages in boom/bust cycles and there was one oh right around the late 1990's that caused everyone to ratchet up pension benefits then wiped out a ton of retirement account value, setting the stage for dodgy investments being made in the 2000's trying to recover?
>Why should retirement accounts get invested in anything but government bonds and index funds?
Here (somewhere near the end) Mr. Blank says that this is what got the silicon valley rolling. When pension funds were allowed to invest, control of the valley switched from the military to the VC funds
http://www.youtube.com/watch?v=ZTC_RxWN_xo
Probably another reason is that bonds and index funds do not yield enough to keep the pension funds going; people now live a longer life on average, so they need to pay more on each pension; so its all screwed up.
Everything is screwed up; now that probably that has something to do with the fact that energy prices & commodities are high; there is less energy to go round, so other creative means are found to create 'wealth'; these tricks increasingly have something to do with extracting something from pocket A and transferring it to pocket B.
And the Zero Interest Rate Policy (ZIRP) has lowered yields on fixed income to next to nothing. No longer are there less-risky investments that yield anything near the rate of inflation.
Because people are different, if you're 20 year-old healthy female you'll have a completely different risk profile from a 64 year-old male with health problems.
If you work in the government you might want to avoid your pension being in your own government bonds because you don't want all your eggs in one basket.
If you're an immigrant who plans to retire back to your home country you might want to limit you exposure to currency risk.
It's not just about betting on being better than the market, it's about aligning your investments (pension or otherwise) with your personal situation and objectives.
If you're investing over the long term and can afford to ride out the shocks then historically speaking stocks have always out performed bonds. That's not gambling.
It's not a zero sum game between you & Goldman. In a growing economy everyone can win by investing.
While cash securities markets (i.e. stocks and bonds) are not a zero sum game, derivatives markets (i.e. futures, options and all kinds of swaps) are zero or negative sum by definition. Also, derivatives markets are far larger in size [1]. There are always 2 parties to each transaction and one makes the money that the other one loses. The additional transaction fees that go to the banks and various other operations providers make it negative sum.
My understanding of the original idea for derivatives was apportioning risks into pieces that could be independently valued by different experts/markets. For example, say a company wanted to finance an X factory in Y country. The original lender would have to be an expert at evaluating risk in the X market and the Y currency market, which is a small pool of investors. If derivatives could split the risk into X market risk and Y currency risk and sell them separately to specialists in each risk, then the factory was much more likely to find funding, at lower rates, etc. The "world" ended up with a factory that would not have been built, with all the associated wealth, which is positive sum. Am I missing something that makes derivatives negative sum in this case?
This is nonsense. With a future, for example, both sides lock in future cash flows and can lead to a reduction in risk for each party. Reduction in risk for each party can be beneficial for each party.
You might as well say that buying milk is a zero sum game, because the milk is either over or under priced. That's just wrong. Financial securities have more to them than just their price.
Can we stop quoting the underlying notional size when comparing size to equity markets? If you know how a derivative works, it's well understood that quoting the notional to represent size just doesn't make sense.
To put it simpler, a terminated CDS contract does not mean there is a loss of wealth equal to its notional, whereas a stock price going to zero in the equities market literally means you just lost the complete amount you invested.
Not to sound offensive, but I've heard this comparison way to many times and it just doesn't add up in terms of prices - most swaps, for instance, have their fixed leg in the single digits in relation to their notional.
That's certainly true for interest rate swaps, but credit default swaps are actually quite similar to stocks. For example when Lehman filed and the stock went to 0, the CDS settled at 91.375 [1] meaning that the protection seller had to send 91.375% of the notional value to the protection buyer. Yes, in most cases there is no credit event and even in many credit events the impairment to the debt is much less than 90%, but also most stocks don't go to 0. This case is a good example because the maximum market cap of Lehman stock was 60 bln [2], but the CDS market moved 270 bln in the credit event (see [1]).
In the modern era of retail investing and hedge funds and liquidity providers, I don't know if stocks and "betting on American industry" are the long term value they were in the past.
Although, if you take the view that corporations are pillaging America and its taxpayers, then owning stock maybe just the hedge you need. If those corporations' managers aren't pillaging the corporations.
I know several people who make a lot of money in trading, and I hear the liquidity argument constantly as the justification for their behavior. They describe the millions that they make as payment for all the 'value' that they've given to everyone; But, as an ignorant, I can't see how those millions could have come from anywhere than other (less informed) peoples' pockets.
To me, the worst part (again, as an ignorant), is that the argument seems practically untestable. They say that if we prevent or regulate these complex trading instruments and schemes, then the sky will fall. But, to me, it just smells of religion.
It's vastly testable, there are thousands of different markets with different sets of regulations.
But your talking about two different issues, the liquidity issue mainly applies to exchange traded assets while more complex instruments tend to be OTC (i.e. custom agreements).
With liquidity you can be a sophisticated buyer and still be willing to pay for it. For example look at when MtGox was lagging by 600 seconds when bitcoin was in freefall, many buyers would happily have paid a hefty fee to be able to trade out of their position instantly without having to worry about what the price would be when the transaction was finally able to get through.
Some of these people are high-net-worth individuals. I sometimes ask them why, instead of trading, they don't take that money and invest it in new research or technology or product development or services. At least then, there would be jobs created, technological progress, more money exchanging hands. But, to them, it doesn't make sense to do that; they make much higher returns, more quickly through trading.
To me, a lot of this money seems to be 'locked up' in liquidity trading, that would otherwise be doing good things for the economy and human progress. Right now, it doesn't seem like the traders have incentive to do other things with the money.
When a friend of mine 'clicks a button' and makes a few million from a trade, how is that adding equivalent 'value' to the overall economy than if he would have taken that money and invested it in a new start-up? Again, this is my total ignorance, but something doesn't seem right. To an ignorant person like me, it just seems like wealth exchanging hands, but how is clicking a button better than employing hundreds of people?
It's "clicking a button" in the same way programming is "typing on a keyboard" - people execute trades of different asset classes for a huge variety of reasons and with different motivations and outcomes.
Let's talk fundamentals: if we didn't have an equity/bond market it'd be much much harder for companies to raise money for growth and investment. If we didn't have an IPO market you wouldn't have company exits - the most common forms of company exits are IPO or sale to a listed company. Without exits it wouldn't be economical for VCs to invest in startups.
All of these things are interconnected, having liquid public markets play a huge part in economic growth by both directly and indirectly financing the growth-makers.
That's how Wall Street works. You give money to Wall Street, and Wall Street in turn chooses to distribute the money to technology or research companies like Google or Merck (or even venture capital funds which in turn invest in start ups). Wall Street adds value by allocating resources.
I am more ignorant than anyone on this subject, I too have similar questions on the stock market as a whole, not just traders. Originally, stock market was created to raise large amounts of capital for big projects/companies. Once the IPO is done, people keep buying and selling stocks - how does it benefit anyone other than the seller who makes a profit? It doesn't add extra capital to the company, doesn't "create" anything (physical, digital or otherwise). Maybe this question is really dumb, but I really can't understand why traders (and other wall streeters) are paid so much
> Once the IPO is done, people keep buying and selling stocks - how does it benefit anyone other than the seller who makes a profit?
The IPO (initial public offering), isn't necessarily the stocks only public offering, so the trade of stock on the market provides the firm the capacity to raise additional capital via further public offerings. (The demonstrated ability of the firm to do this may also influence its ability to raise money through other financing means.)
Investors will generally only be keen to buy into an IPO if they know that there is the possibility of selling the stock in the future in an open market.
Wealth is not fixed. Both parties can benefit from a trade, and often do. A party that wants cash now and another who wants more cash in the future both benefit from a trade (e.g. buying and selling a bond).
I know several people who make a lot of money in trading, and I hear the liquidity argument constantly as the justification for their behavior. They describe the millions that they make as payment for all the 'value' that they've given to everyone; But, as an ignorant, I can't see how those millions could have come from anywhere than other (less informed) peoples' pockets.
Trading is a legitimately socially useful business, but it's winner-take-all. Yes, they provide liquidity and, in doing so, capture proportionately small amounts of money that other principals don't care about. If you need to move $25 million, are you going to notice a difference of a few hundred dollars that an arbitrageur collects (by taking the other side of a bid he judged to be 0.37 cents high? No. You want your trade to go off. Principals would lose money to the bid-ask spread no matter who's in the market; arbitrageurs narrow it by competing against each other.
So why do traders make so much money? Because they're better or more useful than software engineers? No. Because they steal it? No, not that either. Software engineers are seen by the business as cost centers, even in 90+ percent of startups and even at Google (closed allocation).
For traders, it's a different story. If Bob is a little better than Mark, Bob will get 100% of the business and Mark will get nothing. At this point, to do arbitrage you need to be thinking about microseconds. If Bob can execute in 75 mcs and Mark takes 100 mcs, then Bob is going to get all the trades. Trading shops must be meritocracies because they have no other option. If they can't hire good traders, then there's no reason to keep working.
Because trading is winner-take-all, trading houses put a lot of money back into compensation: 40 to 50 percent profit sharing (in a way that, outside of direct P&L roles, is subject to politically fucked-up performance just like everything else) is the norm. That'd be like a typical software company paying $250k-500k bonuses.
If we, as software engineers, want to make trading money (not the 5-10m outliers, but 250-1M, then we need to think about profit sharing-- http://michaelochurch.wordpress.com/2013/03/26/gervais-macle... -- instead of this startup equity that pays off in the distance future, and is subject to horrible terms). I believe that we, as a group, could be making what we're actually worth, but we'd have to convince businesses that we're as essential to their operations as traders are to trading houses and, thus far, we haven't done so.
If Bob is a little better than Mark, Bob will get 100% of the business and Mark will get nothing. At this point, to do arbitrage you need to be thinking about microseconds. If Bob can execute in 75 mcs and Mark takes 100 mcs, then Bob is going to get all the trades.
If Bob were to be kidnapped by aliens, would society be poorer for it?
Nope, but someone else would get the money instead of his client. Think about you engage a negotiator for buying a house and he only gets 5% bargain when another one could have gotten 10% - the seller gets the money you'd have otherwise.
Not at all, but that's how commodity work works. The provision of the commodity is important, but there's a limited market and superficial or unimportant differences (in traditional marketing, branding; in finance, 75 vs. 100 mcs) determine who gets what share.
What traders do adds a lot of value to society. The difference between 75 and 100 mcs is irrelevant. Ultimately, trading is converging on a circle-jerk of machines throwing numbers at each other, but the world is better off with that circle-jerk, and really doesn't care whether it's Bob or Mark who wins.
Trading is the last commodity job.
However, traders don't make more money than computer programmers or professors because they're more important to society (that's clearly not true) but because of the employer/management filter. For traders, the organization is so sensitive to small differences in individual performance as to justify extreme compensation. Software engineers are worth just as much to the world, but employers still see them as cost centers because, while engineers actually have their employers just as much by the balls, it's not as visceral as it is with traders.
If you think of economic input/output relationships as S-shaped curves (I've dealt with this a lot in exploring convexity and concavity of labor) then trading is an area where the precision/scale parameter has gone to infinity and it looks almost like a step function.
If your pension fund doesn't day-trade, you never pay those fees for liquidity.
Liquidity isn't free, and no one is forced to buy liquidity (unless your money is managed by an incompetent/corrupt manager due layers and layers of your employer-sponsored pension contracted to a bank....)
"Caveat emptor" applies heavily in b2b transactions be they financial or otherwise. If you're buying a product then you need to spend money to hire sophisticated buyers, because if your buyers are dumber than the sales-people you're buying from they're going to be fleeced.
This is true if your buying a financial asset, a car or an enterprise software licence.
Just because Oracle sells into companies that could just as well have used postgres that doesn't mean that Oracle aren't producing anything of value, it just means they're taking advantage of the buyer being less sophisticated than they are.
Just because Oracle sells into companies that could just as well have used postgres that doesn't mean that Oracle aren't producing anything of value,..
Oracle doesn't sell software. They sell risk reduction. Someone to sue or blame.
Once you understand that, you see how brilliantly they've achieved product/market fit in a way many people here can only dream of.
Sure some people buy Oracle for risk reduction after having done a sophisticated analysis, but plenty of people buy it because that's what the nice sales person tells them they need and the sales person obviously understand this techy stuff far more than they do.
The dev team says they can just use this "postgres" but the sales person said he'd seen this situation a lot of times before and that dev team was too inexperienced with "serious software" to know they needed to use a proper database rather than a toy one that people use when learning because it's free.
(not to pick on Oracle for any particular reason; this is common in enterprise sales at all levels)
Have you ever read an eula? Have you ever heard of someone winning a lawsuit against a software vendor? Have you even heard of someone getting any kind of monetary compensation for mishaps caused by software bugs?
It's not about the lawsuits, but it is very much about risk reduction. This applies to all consultancies, not just Oracle.
If you hand-roll your own solution for (almost) free using open source components, you're the one who gets fired when it goes down.
If you buy an enterprise-level solution from Vendor XYZ, with a requisite expensive support contract, they fucked up when it goes down, and you are safe because goodness, who'd have thought an internationally renowned firm like Vendor XYZ would ever break? Besides, thanks to our expensive support contract, they're on top of it.
Microsoft, Oracle, Accenture, they all share one thing in common: their product more CYA for middle managers than anything else.
I have similar thoughts about management consulting - it's CYA for high-level execs. You rubber-stamp a risky move with a respected firm so that if the shit hits the fan the firm (and yourself) are insulated from the backlash.
Yes. Just to finish off the argument for you (I think you already get this, just forgot to explicitly state it), not only would the programmer have to assume the risk in choosing postgres over Oracle, but she would typically also not get any share of the thousands of dollars she saved the company by so doing. It's all downside and no upside, so it's no surprise that many people opt for the vendor solution.
>"We like the idea of letting everyone transact freely, but we are uncomfortable with the "winner take all" implication of that policy."
I don't agree with this fully. Your statement implies that "Freely" means "with complete abandon to any sort of soundly regulated and protected system designed to prevent fraud, corruption, exploitation... " -- Also, acquiescing to the "well the system is fucked by design, why are we upset that they exploit the structure of the system" is a cop-out to the fact that their actions are wrong and need to be fixed.
To quote the magnanimous G. Costanza: "WE ARE LIVING IN A SOCIETY, HERE!!!"
But it's not just fraud, corruption, and exploitation. It's probably not even mostly that. It's about being able to just run the numbers a little bit better, aggregated over millions of repeat transactions.
That's part of the narrative I'm talking about. We tell ourselves: "It's only because of fraud, corruption, and exploitation" that all this money is flowing from main street to wall street.
The statement was that "We like the idea of letting everyone transact freely, but we are uncomfortable with the "winner take all" implication of that policy"
But this is not true. We are not uncomfortable with free transactions resulting in winning - we are uncomfortable with "free" being the state of the system whereby the winner is able to do so because there is no oversight over the WAY in which these winnings are achieved.
namely, that one side of the transaction is exploiting their position of data/information superiority for their benefit and as a result, those who are under the delusion that they have a chance of making out well in the transaction suffer the reality of being the victim of having less data/information/sophistication.
We all want "FREE" transactions - but we want them on a level playing field.
THe fact is that there is no level playing field when it comes to the pinnacle of the monetary system.
The system is DESIGNED to not be in anyone's favor but wall street.
Further, they have worked very very hard at tremendous expense to ensure that the regulatory system, bodies and laws are all skewed in their favor!
Ignorance has so badly corrupted the minds of the world that even the understanding of the term Free is lost on most.
There can be an hour long rant on how exactly unfree every one truly is due to debt-slavery.
Is having superior information and data not consistent with a level playing field? What about hiring up a significant portion of all the top college graduates and having them work around the clock to give you every possible advantage? Is that consistent with a level playing field?
My point is that there are a lot of things short of fraud that we consider "meritocracy" (and having superior information and superior analysis usually falls into that category), but those things systematically stack transactions in favor of the parties that can afford to buy them. Even if you have zero fraud, zero lobbying, etc, you'd still see wealth flowing to Wall Street from Main Street.
I think we are in perpendicular agreement. I agree with your statement. I also believe that the system as it is currently regulated, implemented and used is based on a system that is actively working to protect itself and its advantage and that the actions taken by wall street to get/maintain/hide the data/advantage they have is what is illegal.
I am not saying that using or having a better position of data or information is wrong or illegal. I am saying that how they got there in the first place, and what they have done to ensure its perpetuity for them is what is illegal/wrong/exploitative and abused.
The worst criminals of the bunch are those in supposed positions of regulatory authority that are really there to protect the interests of big money.
This includes GS employees setup as Obama's economic advisory.
(Note: often people make the mistake of saying "well do you expect him not to hire/appoint people with intimate knowledge of how the financial system works?" -- No, I expect him to hire/appoint people with express knowledge of how the system works and how it is exploited and abused so that they can identify and go after criminal fraudulent activity.
When you hire/appoint those BENEFITING from the actions of the industry - it protects the criminal/exploitative activity!)
In theory, Wall Street should accrue value in two forms: as a tax for the liquidity they provide, and as compensation for the risk they take. It used to be that the investment banks were mainly middle-men, but increasingly they've also become essentially government-backed hedge funds. Unfortunately, they can use their position as middlemen to extra value from Main Street. Finance should not be like 10% of your GDP, unless you're Switzerland or another country that "exports" banking services. It doesn't produce value itself, it's just a tax on the rest of your economy necessary to ensure the availability of capital.
It's not just running the numbers better. It's having the numbers to run. That's what information asymmetry is all about. One side of the transaction has the data at the most detailed level and have the technological sophistication to be able to operate on that larger quantity of data in a reasonable time frame. The guys on the other side don't even have the data, only aggregated summaries. Even if they figured out how to get the details it requires significantly more technical resources in terms of hardware, software and engineering to be able to compete.
My point is that it's not just that the big guys have better programs...they have better programs and better data and it's frequently the data that makes the difference.
That doesn't seem to be the case, at least in a lot of the major recent crises like mortgage refinancing. It wasn't that they were running the numbers better; it was that they were misrepresenting the underlying quality of the securities in question. Look at the MBIA lawsuit where it was clear that folks on the selling side knew that the securities were garbage. Same with Enron.
There's a popular saying on Wall Street: YBGIBG. It means "you'll be gone, I'll be gone"... by the time the scam gets exposed, the folks who perpetuated will have received their bonuses and be long gone.
Free-market believers assume there must be somebody in the system with the incentives to help those less sophisticated investors. Or that the market will eliminate con artists, because their investments must be weak.
That's how you get Alan Greenspan, thought by some to be a sophisticated thinker, flabbergasted that the events of 2006-2008 were even possible.
I think American public policy has a hard time grappling with Wall Street because the financial sector has disproportionate lobbying power.
Also, I don't think most Americans care about how free from regulation the financial sector is. Most people have a feeling that Wall Street is screwing over everybody and there's nothing they can do about it.
I'm not exactly sure who you mean by "we," either. Hacker News commenters?
> the financial sector has disproportionate lobbying power.
I'm not sure that's true. If Wall Street really had some super lobbying power Dodd-Frank and Sarbanes-Oxley wouldn't have passed in their current forms. Regulating Wall Street is a pretty easy position to take if you're a politician.
The reaction to SOX by Wall Street was fairly mixed, some liked it because it meant the could put more trust in corporate financial statements. Some did not support the bill because of the usual straw man argument that 'regulation makes us less competitive'. Regardless, the passage of the bill does not say anything about the lobbying power of Wall Street, because WS was fairly mixed on it to begin with.
Regarding Dodd-Frank, many people, myself included, believe that that bill was watered down considerably, largely due to the pressure of Wall Street lobbyists. In fact, in the end, a number of Wall Street groups ended up supporting the legislation, largely because they were concerned that if Dodd-Frank didn't pass, then new, more strict regulations would be proposed in the future.
Wall Street contributes gobs of money to campaigns and has some of the most powerful lobbyists in Washington. Considering how unpopular they were in the recession fallout, the fact that the only major retribution was Dodd-Frank is a testament to how much influence the wield.
How is "regulation makes us less competitive" a straw man argument? If your Singaporean or European competitors operate under a set of different and less stringent rules, that wouldn't increase your costs to doing business (and in effect making you less competitive relative to foreign competitors)? Even the regulators know about the costs of Dodd-Frank.
I think Singapore does so well because of the low taxes and because it is one of the few Asian countries in that region that isn't hampered by corruption. Europe's economies are way too diverse to group together, some of them are 'business friendly', some of them are not. The 'Celtic Tiger' was largely due to low taxes, and hasn't turned out too well (most of Europe is hurting right now), so I am not sure why we should aspire to emulate them. Regulatory policies have little to do with their success (but a lot to do with their failures, in the case of Ireland).
I think most people agree that over-regulation is a bad thing. What I take issue with is when political groups and lobbyists scream 'regulation makes us less competitive' anytime regulation is mentioned. The fact is it might increase the costs of doing business a little bit, but it also might mean that my air and water aren't horribly polluted (see Beijing air quality) or that I can count on my retirement account actually being there when I need it. I feel like one side is trying to find a good balance, while the other is being completely obstructionist. The end result is watered down regulatory policies that increase the complexity and costs of doing business, while at the same time, being completely ineffective. One major issue with this result is that this greatly benefits entrenched players, as they are already adept at navigating complex regulatory environments (which keep out new entrants) but in the end, they aren't actually affected by the regulations in any meaningful way.
Just to note, as I always seem to whenever that damn "Celtic Tiger" comes up. It wasn't about low taxes, it was about allowing major US multinationals (Google, Apple, Facebook, Oracle etc) to legally tax dodge on their EU profits. That's where the money came from. Then we all went mental (except for me, as I was dirt poor) on buying and selling property to one another.
Then our last (hopelessly corrupt) government decided to guarentee all of the bank liabilities when the crap hit the fan. The EU decided that one of these banks was never going to pay back the money (Anglo Irish), and so the money the government had given them went on the national debt. The markets panicked, the IMF were called in, and here we are.
Arguing that it was primarily due to low taxes is somewhat incorrect, while if the tax base had been more diverse the current deficit would have been less bad, we were still really screwed by the nationalisation of banking losses.
The US is a model of reaching the right regulatory balance. No joke. The Asian countries are headed in the direction of more regulation as their economies mature and the naturally explosive growth of new industrialization transitions to a sustainable economy. Meanwhile, after decades of stifling over regulation, in the 1990s and 2000s Western Europe has liberalized it's economic policies and become more like the US. Australia has always been like the US and has been very successful for it.
The sophisticated firms just see those regulations as another challenge.
I usually don't call for increased salaries for government workers, but the people regulating Wall Street probably need to be making near-mid-six-figure salaries. Otherwise the ones who are good at their job will just get hired away by Wall Street.
Note that Sarbanes-Oxley was passed after a major scandal, and Dodd-Frank was passed after a financial meltdown that spanned the globe.
What this shows is that Wall Street has America by the balls, and as long as they don't squeeze too tightly, there aren't going to be any restrictions on their behavior.
This would be all fair and good if the risk they took along the way actually accrued back to Wall STreet. But the upsetting pattern that's in place is private profits, public losses. Wall Street isn't so much an engine for extracting value in the way you described as extracting value from the American public: take huge risks, keep the upside in the good years, and ask for a bailout when things go wrong.
I've seen some analysis that says that if you back out government interventions, investment banks have basically been net zero / net negative for their equity holders since they stopped being partnerships and started going public.
>what do you expect in a free market system that rewards every marginal advantage other than wealth to flow from less sophisticated people to more sophisticated ones? ...
>Why are we surprised that they disproportionately get the better end of every transaction?
Because normally, competition in the marketplace thins out such "easy" profit margins, and something is keeping that normal process from happening here. After all, you don't see such exploitation of the unsophisticated in, say, sale of breakfast cereal, where excessive profit margins draw in competitors.
I don't believe the Ivey league recruiting has as much to do with intelligence as it does marketable pedigree. There are much more effective filters if you want to select for intelligence and drive.
Given this, it's a wonder that people try to beat the market and invest in products they don't understand. Index funds are government bonds are much better for the so called "dumb money."
Well you need to ask why don't pension funds hire more talented people ?
It's because those people are expensive and that means having to charge a higher management fee.
And what do consumers tend to base investment choices on ? - management fees. High management fees mean that consumers won't pick that fund.
Consumers can't tell how sophisticated their pension fund managers are so they'll just pick a cheap upfront cost which (potentially) because of poor management will cost them a lot more in the long term.
Even if you paid more, the incentives are wrong. Managers are told (often by state legislatures) to go out and hit unrealistic return targets, because to lower the targets would mean the states have to fund the pension more. If they hit the target, they keep their job. If they miss their target, they get fired. What would you do?
This is also why state pensions like to jam money into alternative investments like hedge funds and venture. They're chasing yield.
The pension fund managers are stuck between a rock and a hard place. States underfund pensions while state employees keep demanding ever larger retirement benefits. So as a result they have to seek insane returns on their portfolios.
Yup. And eventually it ends in tears, because they fail to hit their ridiculous return targets and the pension ends up massively underfunded. But of course at that point, the politicians are either gone, or just blame the fund for failing to hit targets.
I worked at Lehman from 2004-2008 in investment banking and on the bond trading floor and I think I have a little more balanced view.
Yes, there are people on wall street that hate their jobs. Yes, there are people obsessed with money. That's easy to point out. But there are also some people that are there because they like working with their friends and making big bets, and getting proven wrong or right. It's actually similar to the culture of being a contrarian that I see in SV. And as to the point where the guy felt shorted by a million dollar bonus, wouldn't you feel shorted if you made the company 10x that in profit on your trades, and all your friends at other firms that made 10x got a bigger check than you? That's human nature, not something specific to wall street, even if it's easy to throw up your hands and say how shocking it is because of the amounts involved.
Anyway, I don't mean to be overly harsh on the article. It's possible my additional time there put some blinders on, and I still have a lot of friends that work on the street (a good percentage of whom actually like their jobs). It was really interesting to get Nick's perspective, and it's especially awesome that it's from someone else who has jumped over to startups from wall street. Just throwing my 2 cents in.
One more point regarding the bonus question. I don't believe that Wall Street properly accounts for the amount of risk traders take. Should that trader receive 10% of the money he made for the bank that year? No, absolutely not. Because he or she could lose just as much or more the next year. The time horizons are skewed and people on Wall Street are compensated based on short time horizons when the risk in fact is spread over many years. Unfortunately, when things go sour, the general public pays disproportionately.
Yes, exactly. This nails the fundamental problem with the street in my view: unlimited upside, limited downside. You risk everything and have a great year you are rolling in cash. You aim high and fail miserably you probably get fired and maybe even picked up at another bank. This doesn't even get started on the lack of criminal enforcement for fraud, etc. Right on.
Oh, I didn't mean to imply that there is fraud in the vast majority of cases. Just that there is some subset of that behavior that produces fraudulent activity.
Appreciate this perspective. Not hard to imagine why working with friends would be fun. I have many friends who still work on Wall Street or in the financial industry. I don't disrespect them for it, although I do wish more young smart people were focused on making things rather than transacting. I tried to write this post specifically about MY experience and stay away from generalizations as much as possible.
> I don't disrespect them for it, although I do wish more young smart people were focused on making things rather than transacting.
It's six of one, half a dozen of another. You either peddle exotic financial instruments on Wall Street, or peddle advertising in Silicon Valley (or work on something like Glass or self-driving cars that's completely subsidized by advertising profits). I don't think there is anything more noble about finding new ways to convince people to buy cheap Chinese crap they don't need.
> I do wish more young smart people were focused on making things
Yep, I'm with you! Thanks for writing the article, I enjoyed reading it. We may have even walked by each other on the third floor at 745 7th ave at some point. Ha.
> wouldn't you feel shorted if you made the company 10x that in profit on your trades
That guy didn't make the company all that money entirely on his own. Lehman supplied the capital, they get the bulk of the profit. That's how it works.
If he wants the truly big bucks (as if a million isn't), then he should trade his OWN money. But of course he probably didn't have anywhere close to enough to do so.
> That guy didn't make the company all that money entirely on his own. Lehman supplied the capital, they get the bulk of the profit. That's how it works.
Capital doesn't sit there and make money by itself. The allocation between how much of the profit the bank gets versus the trader is itself a market transaction--if the bank low-balls traders consistently, they'll just go to another bank. If the supply of traders who can do that is low relative to the amount of capital available to invest, bonuses will go up and traders will take a larger allocation.
Yes, that's true. In fact, that's true of all employees at all companies (just replace "trader" with "employee" and "bank" with "company").
However, we do not know that this trader was underpaid relative to other traders. All we know is that he was unhappy with his bonus. Once you join the Manhattan rat race, you'll find all sorts of ways to be unhappy with your bonus no matter how big it is and regardless of whether you are paid the same relative to your peers or not. In Manhattan, the sky is the limit as far as apartment prices go, for instance. If you want a place just slightly nicer or in just a slightly more ideal location, after a certain point that might be an extra million right there. There's a culture of making everyone constantly feel poor, especially after a transition in the 1900s where it became hip to live in the city rather than out of the city.
You conveniently ignored "and all your friends at other firms that made 10x got a bigger check than you." People compare themselves to their peers. That's how it works.
I "ignored" that because it's total speculation, invented by the person above. It wasn't included in the source article at all.
And it's also completely irrelevant. Some of his peers on Wall Street got a bonus not of $2 million but of $20 million. If you can't emotionally handle that, then yes, you should definitely get off of Wall Street. You will never be the guy making the most money there.
The only people who are compensated exactly for the value they create are the people who risk their own money.
What likely happened is the guy in question pissed off a Senior VP and he and all his friends made the first ~$10-15 million. His friends get $2 million and he gets half.
I'd be mad, too. Just because it's a lot of money doesn't mean he should be happy with getting a less proportionate amount.
I cringed when I read this headline on HN because I too worked for Lehman between 2006 and 2008. I felt the same way Nick did even around the same time (wanting to go back to making "real things"). However, lately I feel like I have come back somewhat full-circle. Many of the issues he complains about is rampant in almost of every industry.
For example, Groupon was basically taking advantage of unsophisticated small businesses. How much brain power in SV is devoted to tricking people to click on ads, "covert users" or become addicted to Zynga-style games? How many things are sold only because that company has the strongest name-brand even though better versions exist? Could you have sold the product for less than the customer paid and still make a profit?
You are almost always taking advantage of a customer in some ways but still providing a service or product that the customer ultimately wants. WS is just easy to pick on because they are the most blatant about this practice while at the same time protected by the government.
Bingo! All the interesting, financially-remunerative jobs these days for ambitious young people are bullshit. Not in the sense of not creating value (because I think there is value created in these industries), but because they are all open to criticism of this sort in one way or another.
Are you a rocket scientist? You probably make your money directly or indirectly from the military industrial complex. Are you a doctor? You'd make much less money if the AMA didn't artificially restrict the supply of doctors. Are you working in Silicon Valley? Your product is either based on ads, or is a side-project of some company that makes all its money on ads (e.g. Google, vis-a-vis Glass or self-driving cars).
It's not worth worrying about this shit. Do something you find interesting if not morally fulfilling, and try to make a lot of money doing it because we live in a country where your kids can't see a doctor unless you can write the checks.
I actually agree about the group-on example, but i strongly disagree with your broader point. First of all, getting someone to click on an ad or pay for a video game is not even in the same dimension as destroying the pensions of millions of hard working people or crashing the economy only to get bailed out by taxpayers, and so on. Second of all, SV and developers in general actually produce something of value, as opposed to the gambling wall street engages in. There is a difference between making a profit by producing something of value, and ripping people off by hustling and gaming the system. Third of all, there is so much interesting computer science happening all the time in the developer community, so while wall street invents new obscure financial products, "SV" invents things like AWS, google maps, smart phones, and so on.
It is true that the stakes are higher when you are dealing with money management, so people who call for more regulation and scrutiny of WS do make a lot of sense. But, I still stand by my opinion that the practice is pretty prevalent in all industries and merely a symptom of a competitive capitalist society. At some level, your product or service is not 100% in the best interest of your customer, whether it is about the best fit for the customer, price or a potential alternative. I am not making a moral judgment call on it, it just what I have noticed.
I totally disagree with your second point, however. Banks are providing many services that are valuable to their clients. For example, they help companies and institutions raise cheap funding (usually tailored to the wants of the company and the investors), allow liquidity for investors to offload unwanted investments, provide advice on takeover, acquisition and restructurings, help with the price discovery process, invest directly in companies through VC and PE firms etc. If they provide nothing of value, why does the economy suffer so much when the banks are unhealthy?
The "gambling" aspect is really a byproduct of the fact that no one can predict the future in markets - just like a project manager usually needs to guess on which project to invest the company's resources in. Business is always about intelligent gambling and hustling no matter where you are. I feel like many engineers don't understand this because they often believe that success is only directly dependent on "building something of value" whereas in reality it is often due to good marketing and a fair amount of luck.
I agree with your third point (and is why I am a software guy) although I was making point about WS providing a valuable service too and not doing comparisons between raw innovation in the industries. Although to be fair the financial space is much more limited and regulated than the software and hardware space is, so it is not surprising that SV is more innovative. Moreover, WS has a been a big player in terms pushing the envelope of high performance and concurrent systems, artificial intelligence/pattern matching/forecasting algorithms and other cool technology; whereas, many SV "innovations" recently have been yet another photo sharing app and look at this old program that has been ported to the browser. That being said, the open-source developer community is definitely something that is amazing and unique to SV.
I think you raise a very interesting point. When you read stories about trading, often people bring up the question, "What value does it provide to society?" Much of the commentary I read wants to apply that judgement to trading, but nowhere else. Are designer jeans a benefit to society? Is fast food? Are casinos? Does everyone's job need to be beneficial to society? And if so, who makes that call?
Clearly designer jeans and fast food are more beneficial than casinos and zero-sum trading. The first two are at least somewhat useful, are not that addictive and do not harm anyone except maybe people who eat too much fast food. Casinos are of some entertainment value, but are very addictive and have negative effects on neighboring communities. Zero-sum trading is tricky, it is not that addictive but very few people benefit from it at all, less than from casinos and much less than from designer jeans. At the same time negative externalities probably exist but are not well studied.
I worked at Lehman for 4+ years (left in 2008) and while I didn't feel so negative about work (I was more senior than the OP) I definitely was in a spot where I knew that if I kept at it for another 10-20 years -- no matter how much money I made -- I would feel like I wasted my time.
I went back to tech, and now I have a job where I'm still well paid by any reasonable standard, and I really enjoy what I work on and who I work with. Given how much of our lives we spend at work and thinking about work, it can be a mistake to overvalue compensation as an element in our career decisions.
I'm always curious when I hear things like "Lehman for 4+ years" because, based on the numbers thrown around on HN and blogs like this, it seems likely you could have a net worth over a million dollars.
While not the "F You" money many here dream of, it still seems like a few years on wall street would give you a nest egg that would make it easy to live comfortably on any other salary (whether that's tech or teaching or bartending).
Do many of wall streeters who left after 5ish years do that? Or do most of them blow all their money? I think being under 30, a millionaire and having $PRESTIGIOUS_FIRM on your resume would be a pretty good setup, even if the work itself sucked.
That's not generally how it seems to work. For junior bankers under 30 (analysts and associates) you're making good money, but not such great money that you're putting away hundreds of thousands of dollars a year after your expenses and taxes. I can't recall ever hearing of someone saying, "I've worked 5 years, I've saved $500K, but instead of making $500K next year, I'm going to retire."
Also, the lifestyle (and partner, and kids) that you end up with while making banker money means that $1M is not remotely "quitting money", because it won't last long enough. I'd guess most folks would talk about $25M or $50M min for that in the industry, and you're not saving that anywhere below MD. Bankers have banker wives, banker mortgages, and their kids have banker tuitions. (One of my bosses had an $8M mortgage on a $12M home. That's ~$30K in mortgage payments a month... no way he could quit) I'm not saying anyone should feel bad for them, just the whole idea of "save up $1M and quit" doesn't make any sense in reality.
Finally, there's a lot of pride/ego/image folks have in their job and their job title, for better or worse. Even if it ruins their life. I didn't love being a banker, but I can't deny it's not fun telling folks you're an investment banker.
(Also, it's worth pointing out that people don't go work 100 hour weeks for years on end just so they can quit with $1M. They're doing it to have $10M or $100M.)
I absolutely understand that $1M doesn't seem like much while on wall street, as I said in my original comment it's not early retirement / "F You" money. For the purely money-driven clearly they keep working and living the lifestyle.
But for the people who do leave, as you did, and the blog author, and presumably the others considering which foul acts are better than going to work each day, I have to think their lives are still on a much easier trajectory. If you have $500k and hate your life, you can easily take a year off to figure out a new plan, go to grad school without worrying about cost or lost wages, start a company, etc. If you hate your job as a dishwasher you probably don't have a lot of options, but as a wall streeter, it seems like you should be able to walk away at any point and still be better off than 95% of Americans.
I guess I just wonder how many people do take that opportunity. $500k makes you a BSD in most of the US, but if you've only ever known prep school, ivy league then wall street, I suspect the idea of living and working elsewhere sounds repugnant.
Yes, but you're forgetting that this is a business where pretty much the only reason you're there and successful is because you're either enormously ego or money driven. Otherwise you just wouldn't last. Lots of people don't last very long regardless.
Someone who will work 100+ hours a week -- despite being able to make $200K at a regular 40 hour a week job -- is not the kind of person who "takes a break" because they have a little cushion in the bank. These are incredibly hard core people who spend every minute of their day figuring out how to be just a little bit more successful than they are right now. Their goals are to make millions per year.
I've worked with people who were worth more than $2B and up and would pretty much cut your heart out with a spoon if it meant an extra $100 in their pocket. As another banker pointed out, that's part of why they're worth $2B, and we're not.
I worked for two years in Canary Wharf and didn't change my lifestyle so I was able to save some money. I just announced I was quitting this week and I am currently trying to think about what to do next. Which can be pretty much anything. It's hard to decide what to do next when there's no limit.
Most of my friends did change their lifestyles while working in Canary Wharf and when they decided to leave they had no money at all. I'm glad I avoided that.
The fact of the matter is that banks are up or out. Most people won't make MD, either because they can't stand it anymore or they're asked to leave. So most "take that opportunity." As for what they do--they take a few hundred K and a prestigious job title to a cushy corp finance position or similar. The superstars go to a hedge fund and make even more money.
Usually you don't get a really high salary until you've worked a few years in the field. That's the trap, you think "I'll work there a few years and save up", but then after a few years you get to the point where your salary is really going up and it's hard to leave when you start making real money...
Yeah... I was going to add this. When you're making X, but you can see making 2X in a year or two, you're very reluctant to let it go. It's just human nature (and you also don't tend to consider the outcomes where you don't make 2X, or the opportunity cost.)
You're probably not saving a million in four years. First year analyst is like $120k or $130k all in. First year associate (fourth year in, -ish) is like $250-300k?
Something like that. Plus there are partial years involved - new classes arrive halfway through the year, so you only get 1/2 the bonus that year.
Also, only a very small percentage of people last that long. Figure maybe 20-25% of first year analysts survive three years to become associates, and maybe 20-25% of new post-MBA associates survive three years to become VPs. (Some leave for better jobs, of course.)
I used to keep a spreadsheet listing every member of my associate class, and the date they quit. I handed it off when I left; I'd guess that 9 years later no more than 5 out of something like 80 are left at the same bank, but they're probably Managing Directors.
I have a strange sense of sadness for my friends who are "stuck" on Wall Street. Strange because it's weird to feel sad for someone making $250k+ per year, but I've heard their first hand accounts of how much they hate their jobs. If you're the type of person who can step back from the ego-driven culture of investment banking I feel like everyone reaches the same meta-conclusions that Nick did. It's just unbelievably hard for them to step away from the money.
I mean, I'd like to think I would be able to make that choice and that purpose and meaning would ultimately trump a large paycheck. But nobody's putting $250k+ in my pocket so it's genuinely hard to say.
One of the hardest parts about leaving is that after a few years all the friends in the world that you have are in finance because they are the only ones that can afford the restaurants, bars and activities as you. Then when you decide to leave it means giving up all those friends because after leaving you no longer will be able to afford hanging out with your friends from finance. It's surreal to have friends that you can only maintain via your current job.
"... of my class of 1400 graduates from Yale, forty percent took jobs in finance."
This reminds me of an interview with the President of Iceland, where they let their megabanks fail.
Speaking of the downside of having a huge banking sector, he said "... since then you have seen a great growth period in the Icelandic IT sector, the high-tech sector, the manufacturing sector, because they could suddenly get the engineers, the mathematicians, the computer scientists."
I was at Lehman in 2007-08 and saw first-hand the firm implode. But what interests me was this statement:
"I would spend days attempting to understand the intrinsic value on structured bonds collateralized with physical jet engines or commercial real-estate scattered across various regions of the country."
Everybody bangs on about how complicated and opaque products like derivatives and asset-backed securities are... yet the most complex product of all no one bats an eyelid at: the share (or stock). The pay-off of a derivative can be modelled by a mathematical formula (and if not a closed-form solution than via a Monte Carlo distribution) but the pay-off of a stock - that's quite different. Modelling future company cash flows is not trivial.
The experience reminded me of one as a child when I unfairly sold some worthless items to neighbors at a stoop sale in front of our house in Brooklyn. When my parents found out that night, they made me go from home to home on our block returning the money.
I remember living in Wood Green, a vaguely rough area of London, where people put the sofas they no longer wanted out in the front garden in case someone else did.
Anyway, we were getting rid of an Ikea box-case-thing, and stuck it outside, and a kid of say 11 asked if he could have it, and took it off on a toy truck.
He came back and pushed a card through the door saying thank you (it would be "just right to keep all my toys in"). I am pretty sure his mum made him write it, (long story) but we kept that card in the back of various drawers through maybe two house moves because it was an unexpected example of politeness and parental guidance.
One of the crazy things that social media might sort out one day is that i would strongly consider recommending that kid for a job, or university, simply on the strength of that one act. No idea who or where he is of course but there we go.
I too joined Lehman as a graduate in 2007. My experience was different; I was based in the London office and was in a back-office role (IT Infrastructure). I also worked there as an intern in 2005-2006 (or "Industrial Placement" in Lehman-speak).
I have to say I enjoyed my time there. I primarily worked as a developer in a non-developer team, but was continually encouraged by management to pursue this work. This led to work with development teams in other regions, which really helped expand my horizons.
When I started making money from my website (independent of Lehman and unrelated to finance) and wanted to start it as a business, I had to approach legal and my division's MD for approval. They were completely supportive and again encouraged this work.
The downfall of Lehman was a sad but strangely exciting time for me. I remember staying up all night on September 14th watching the number of remote access sessions running, and suspected those users were doing the same as me and watching Bloomberg for an announcement. The following days and weeks saw a lot of interesting events take place, particularly from an infrastructure point of view. Barclays and Nomura (who bought different regions of the bank a few weeks apart) both rushed to connect their infrastructure to Lehman's, which resulted in some curious situations I'm still reluctant to mention publicly!
The most interesting part of it was the transition to Nomura for me. I stayed on there until mid-2010. It was a very different environment to Lehman. Our small team was given vastly expanded responsibilities to build out key services and infrastructure lost during the bankruptcy, and our team truly operated like a startup for about 9 months. We toiled tirelessly with teams in other regions to get services online before deadlines, and got a real sense of achievement out of it.
As things at the day-job settled down, my website became a startup and it was time to join that full time. Again, management was very supportive (incidentally the same management as at Lehman).
I look back on my time at Lehman/Nomura with fondness and truly believe my time there gave me experience I couldn't have received anywhere else.
Not to be too self-promotional, but this is literally the problem we're solving at Addepar.
15 years ago the power shifted from banks to hedge funds, and then in 2008 it started shifting to investors. But they still don't have the tools to understand what's going on.
If you're interested in solving problems like this in an engineering-led company, please email me. I'd love to talk.
There's a whole lot we don't discuss on the website, which is focused towards current target customers of the tool we've built vs. our broader goals to bring transparency to the financial world.
First we've built a (we've been told) very powerful tool to quickly group, filter, sort, and compute standard financial metrics on a portfolio. Importantly, we don't care where you own your securities. It can be holdings from financial accounts, operating companies, homes, art, private options, manually brokered CDSs, whatever. Shockingly, our customers like to pay us a fair amount of money for this tool alone!
On the back end this wasn't easy. We have to normalize the incredibly varied (and often inaccurate) information from banks, third party data providers, excel spreadsheets and other systems. Reconciliation, all day.
Second, if facebook has a friend graph, we're creating the financial graph by aggregating ownership across all sources for our customers to analyze and report on.
At a high level, the financial world (shockingly) lacks a standardized way of communicating information about ownership and transactions. There are complex and specific protocols like SWIFT and FIX, but no standard way of saying "this is what I own, this is what I used to own, this is how it's changed, etc." Banks each make them up with hundreds of unique data formats, often sent with COBOL-style headers. It's 30 year old technology.
Long term, we'd like to open this open both as a data format for representing financial data and as a set of APIs for building tools to interact with financial data.
To use another analogy, if you wanted to make a phone game in 2004, you had to build a phone. Then the iPhone came out. If you want to make a program to analyze portfolio risk in 2013, you need to build out relationships with an entire network of banks, data providers, and customers. We want to be the "app store" for those tools.
There are a million other ways to make a platform like this valuable, but I'll save some of the juicier (and more strategic) ones for personal conversations if you're interested :)
Investment bankers make money because they are allowed to borrow enormous sums of money (leverage) to invest. In other words, they are allowed to gamble with the money of others with very little consequences. There is no other industry where a company would be allowed to take on that much debt. It's like the old joke: How do you make a million dollars? Start with n million dollars! Even if you do make money in finance, your contribution to shareholders is probably a lot less than it would be in another line of work. Here [1] is an excellent write up about it.
In 2008, Barclays had over 43 times as much assets as they had equity (leverage ratio) while GlaxoSmithKline had a leverage ratio of 5. In 2011, GSK had a return on assets (money made from assets at its disposal) of 15%. Barclays had a ROA of 0.25%. GSK had a return on equity (ROE) of 67.2%, while Barclays had a ROE of 6.1%. In the same year, Barclays Capital (investment bank part of Barclays PLC) had a ROE of 10.3%, but had a leverage ratio of 55 and a ROA of just 0.18%. If you paid Barclays Capital employees the same salary as GSK employees, the pre-tax profits of BarCap would have doubled. That is why bankers pay should be limited — their ROE would be better although their leverage ratios are still way too high.
TL;DR version: If you want to work in a field where you generate real value instead of gambling with someone else's money, find a job where you make things. The world doesn't need more inappropriate math models of finance (no, the market is not always rational and large volatility is more common than you think) — it needs real research.
I don't know the numbers but I'm not sure using 2008 data gives a fair picture. If the ROA of Barclays would have been consistently so much lower than that of GSK, the capital would simply gradually move to GSK. Banks are not allowed to borrow money, their creditors want to lend them money. (Presumably because TBTF lending is perceived to be a safer business than risky development of pharmaceuticals.)
some will read this and think: "disgusting. thanks for the honest appraisal of what it's like... and it's disgusting."
Others will read this and think: "holy crap man, the people that are screwed by the company still make just under a million! I totally want to work on wall street. I'll be rich"
When Michael Lewis wrote Liar's Poker he was shocked over the number of people who contacted him, asking for advice on how to get into investment banking.
I probably wouldn't like the environment at such bank. But yet, making U$ 20.000 a year, a million dollars is the stuff of dreams - 50 years at my current salary.
The freaking lottery here in Uruguay doesn't give a million dollars !! (the current Cinco de Oro pool is U$ 125.000)
PD: Yes, I'm quitting as soon as I get something else that pays the bills. I neglected to stay up to date in tech and am struggling to get a good job on the open market.
I remember a friend who was telling me that only reason this wall street thing works is because there are enough not-well-informed people who will continue to feed money into the market for other well informed people to profit from. It is about people being in a market that they know very little about in a hope of making some riches.
Great article. I had similar thoughts when I quite my Investment Banking career.
What I was surprised by in the bank is how many people think that the money make other people respsect them. They forget though, that most billionaires are respected for the things they created, not money they made. Money is just the by-product.
"In what possible reality can someone receive a million dollars and feel as though they got fucked?"
It's all relative. I've got friends living in $500k homes, and they still feel the need to keep up with the neighbors, at great expense. Keeping up with the Joneses is a sure way to be perpetually on edge.
But more to the point, a person in a company like that might get $1m, but knows the people around them got more for doing less, because they had a better boss, or knew someone who knew someone. I don't think the dollar amount specifically was what pissed that person off as much as knowing how much of a political game the whole thing is.
"When you’d rather have someone shit on your face than go to work, it’s probably time to leave." What's unfortunate is that money is capable of convincing people to stay around in situations where they may even come close to such a state of mind.
While I'd like to say that I'd leave well before, everybody has a price, and it sounds like Wall Street is willing to pay it.
The government needs them, who else is going to buy the bonds issued by these Governments. For example, in India , only 19(as of Jan 12) fat ass financial companies are authorized to buy Indian Government bonds at primary market, and if few of them had to collapse, who would buy it (less competition -> less demand -> low value)
>What this bizarre reality really meant is that I couldn’t be myself.
Ugh.
In my experience, this is one of the most painful situations to be in (I've been in one myself, obviously). Pretending like you're someone who you're not (or worse yet, feeling that you have to dance this dance) is unexpectedly draining and demoralizing.
"'We are important providers of liquidity that create stable financial markets. We’re a crucial part of a system. And besides, if we don’t do it, someone else will.' These are the lies that people tell themselves so that they can buy larger homes."
Both of these things are completely true, and that's why American public policy is having such a hard time grappling with Wall Street. We try to rationalize the state of affairs by pointing out all the ways that Wall Street has an "unfair advantage" but the fact of the matter is that: what do you expect in a free market system that rewards every marginal advantage other than wealth to flow from less sophisticated people to more sophisticated ones? We like the idea of letting everyone transact freely, but we are uncomfortable with the "winner take all" implication of that policy.
Wall Street: 1) Hires some of the brighest people in the country (e.g. 40% of the author's class at Yale); 2) Aggressively weeds out that impressive pool by forcing out all but the most promising people within a few years; 3) Trains them rigorously and maintains a level of institutional knowledge transfer that tech companies can only dream of.
Why are we surprised that they disproportionately get the better end of every transaction?